The Implied Premium and Growth Strategy—Evidence from S&P 500

Sue-Fung Wang¹, Yi-Cheng Shih², Xiang-Jun Lai¹
(1. National Chiao Tung University, Hsinchu, Taiwan; 2. National Taipei University, Taipei, Taiwan)

Abstract: Mispricing means the market price is deviated from intrinsic value. This difference, so called implied premium, might mainly be due to the information asymmetry from firm’s growth strategy. The market tends to have a myth of paying too much premium for firm’s growth. In general, firm pursue growth through diversification or focus strategy. Literatures have seldom discussed the relationship between implied premium and diversification. Therefore, the main purpose in this paper is to examine whether the implied premium is significantly associated with diversification or not. Our results show that diversified firms have higher implied premium. Meanwhile, the degree of diversification of high-tech firms has greater significant relationship than that of non high-tech firms. It implies that investors always pay too much for the growth of high-tech firms.

Key words: mispricing; residual income model; diversification

JEL codes: D82, G32, L25